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Definition
SSCBA 1992 s2 does not define what a secondary contributor is, it merely explains who it is. If you were to change the word "contributor" to "person who contributes" (that's what a contributor is), the legislation would read: the secondary person who contributes in relation to any payment of earnings to or for the benefit of an employed earner, is in the case of an earner employed under a contract of service, his employer. There is no comma between "contributor" and "in relation to any payment".
I thought that EA was designed to replace the payment for SSP..
... so now the government are saying that director only companies are not entitled to a government funded SSP payment, irrespective of how much they are actually paid.
SSP
Hi there Jekyll & Hyde,
To the best of my knowledge Government funded SSP disappeared on 06 April 2013, when the first employment allowance was "given to us Employers."
This was at the time when millions were spent on letters promoting the employment allowance to all employers but the government failed to disclose the withdrawal of government funded SSP. . .
Dwile flonking
Dear jcase
When a word or expression is defined in an Act or SI that is the meaning the word or expression has for the purposes of that Act or SI. It is a waste of time to go looking in a dictionary for the meaning.
"secondary contributor" is defined in short, as the employer of an "employed earner" or office holder. The making of actual contributions is absent the definition.
See Mike Truman's article "Having a laugh?" in Taxation.
http://www.taxation.co.uk/taxation/articles/2010/03/03/20046/having-laugh
Definition
My point was, and remains that SSCBA 1992 does not define what a secondary contributor is, only who the secondary contributor is.
Perhaps The Social Security (Contributions) Regulations 2001 can give some clarity:
“secondary contributor” means the person who, in respect of earnings from employed earner’s employment, is liable to pay a second Class 1 contribution under section 6(4)(b) of the Act (liability for Class 1 contributions)(25);
Now that's a definition of what a secondary contributor is and, I'm guessing is the basis on which HMRC issued their guidance.
ICAEW view
I was at the annual ICAEW tax conference on Friday and this discrepancy was brought up by the panel.
They said that as written the legislation is inconsistent with the guidance.
The ICAEW had been in touch with HMRC/Treasury about several points coming out of the Budget and received speedy responses on all of them. When they raised this point they received radio silence.
You could proceed based on what the legislation says, but the ICAEW panel said that if they were betting people they'd be placing odds on the legislation being updated to match the guidance - not the other way around (timing issues of the change, notwithstanding).
NI legislation vs HMRC guidance
the ICAEW panel said that if they were betting people they'd be placing odds on the legislation being updated to match the guidance - not the other way around.
If ICAEW are right that the legislation will be amended to match HMRC's guidance, then it should not be too onerous to meet these requirements
A company is no longer eligible for the allowance if only one employee (or director) in the limited company is paid above the Secondary Threshold [and] that employee is a director of the limited company......
If you are affected by these changes and at the start of the tax year your company is no longer eligible to claim the Employment Allowance, you should stop your claim....
If your company circumstances change and more than one employee or director earns above the Secondary Threshold, you’ll be eligible for Employment Allowance for the whole tax year.
This includes companies where..... the company employs seasonal workers where one or more is an employee earning above the Secondary Threshold in a week.
If the subsequent legislation reflects the above advice, then a company need only employ a seasonal worker for one week, paid at least £156 for that week, to qualify for the Employment Allowance. We shall, of course, need to wait for amended legislation to see whether this becomes law.
Given recent moralising in the press about tax avoidance, how 'dodgy' will it be perceived if a sole director employs their spouse for one week for £156 in order to claim up to £3,000 of Employment Allowance? In reality, of course, the maximum allowance that one is likely to make use of in this situation is £398.54 (being a tax-efficient salary of £11,000 less £8,112 @ 13.8%).
Simplification, please!
Although the amount of employee wages and NIC in this situation is small, the fact that incorrect HMRC guidance has been posted on gov.uk shows that professional quality control processes have not been followed. In my view the process should be:
1. The person who writes the guidance should read the legislation first and base the guidance on that legislation
2. The draft guidance should be reviewed by a more senior person who understands the legislation and checks that the guidance is in line with the legislation.
3. The guidance is published with links to the original legislation.The number of errors in guidance on gov.uk undermines the trust in the site as a reliable authority, and because the gov.uk site represents the views of HMRC; trust in HMRC is undermined.
Even better, could they not improve the processes in advance of legislation being made so that things are made simpler, not even more complicated! Then they would also be less error prone.
Thanks so much for flagging this up and for all the comments, it is really helpful when the extent of fiddly rules that take ages to keep on top of and achieve little can seem nightmarish at times.
Employment allowance, process and trust in guidance
Many thanks, Rebecca, for the succinct summary of the issue and keeping the debate going. HMRC listen up.
No error
The Social Security (Contributions) Regulations 2001 defines secondary contributor quite clearly:
“secondary contributor” means the person who, in respect of earnings from employed earner’s employment, is liable to pay a second Class 1 contribution under section 6(4)(b) of the Act (liability for Class 1 contributions)(25);
On that basis the HMRC guidance is correct.
SSCBA does not define secondary contributor. It merely explains that the person who... is liable to pay a second Class 1 contribution in relation to any payment of earnings ...., is in the case of an earner employed under a contract of service, his employer.
I agree with this...
The Social Security (Contributions) Regulations 2001 defines secondary contributor quite clearly:
“secondary contributor” means the person who, in respect of earnings from employed earner’s employment, is liable to pay a second Class 1 contribution under section 6(4)(b) of the Act (liability for Class 1 contributions)(25);
On that basis the HMRC guidance is correct.
SSCBA does not define secondary contributor. It merely explains that the person who... is liable to pay a second Class 1 contribution in relation to any payment of earnings ...., is in the case of an earner employed under a contract of service, his employer.
I thought this as soon as I read the SI - and before I read the 2001 regulations. Referring to "“(a) all the payments of earnings in relation to which C is the secondary contributor in that year....", I assumed that would mean that there has to be a secondary contribution of greater than £nil. Reading the definition above I'm even more convinced - the 2001 Regulations specifically refer to the 1992 Act (http://www.legislation.gov.uk/uksi/2001/1004/pdfs/uksi_20011004_290216_en.pdf) in Reg 1 (2) - i.e. it applies the definitions to the 1992 Act. As JCACE points out, the 1992 Act only identifies who the secondary contributor is - which is necessary because this isn't always the employer.
The wording "is liable to pay a secondary Class 1 contribution under section 6(4)(b) of the Act (liability for Class 1 contributions)(25);" is a far stronger indication that an actual contribution must be incurred for at least two people when you reread the new SI in context.
Whilst this probably supports HMRC guidance in a roundabout way, I also suspect that this is by accident rather than design, and expect the excluded companies legislation to updated - for clarity if nothing else.
Can you not "pay" NI Contributions at a zero rate
The Social Security (Contributions) Regulations 2001 defines secondary contributor quite clearly:
“secondary contributor” means the person who, in respect of earnings from employed earner’s employment, is liable to pay a second Class 1 contribution under section 6(4)(b) of the Act (liability for Class 1 contributions)(25);
I thought under the National Insurance legislation, an employer is required to pay Secondary Class 1 National Insurance contributions at a 0% rate on earnings above the Lower Earnings Limit and below the Secondary Threshold. If correct this would reduce the Threshold for a weekly paid second employee to £112 even on the alternative interpretation..
Which came first?
I've been puzzling over this issue since the debate around paying a second earner a minimal wage to dodge the EA restriction was mooted.
I'm not entirely sure HMRC were behind the latest guidance - they may have been under orders from their political masters.
In February a question was asked in the Commons about the apparent ease with which SI 2016/63 could be negated. David Gauke made a carefully worded response which could be interpreted in more than one way (but is consistent with HMRC's latest guidance). I suspect there were red faces all round because of what seems to have been a failure of communication between those legislating and those drafting the legislation. While that's all by-the-by, I do wonder if there'll be a further tweak to the regulations to tighten the availability of the EA further.
Following Gauke's statement my view was, and is, the same as the ICAEW's - one week's worth of wages for a second earner above the secondary threshold will be enough to qualify an otherwise non-qualifying company for the full EA (assuming it pays enough NI to make use of it.
And make the second employee actually does something, presumably
I've been puzzling over this issue since the debate around paying a second earner a minimal wage to dodge the EA restriction was mooted.
I'm not entirely sure HMRC were behind the latest guidance - they may have been under orders from their political masters.
In February a question was asked in the Commons about the apparent ease with which SI 2016/63 could be negated. David Gauke made a carefully worded response which could be interpreted in more than one way (but is consistent with HMRC's latest guidance). I suspect there were red faces all round because of what seems to have been a failure of communication between those legislating and those drafting the legislation. While that's all by-the-by, I do wonder if there'll be a further tweak to the regulations to tighten the availability of the EA further.
Following Gauke's statement my view was, and is, the same as the ICAEW's - one week's worth of wages for a second earner above the secondary threshold will be enough to qualify an otherwise non-qualifying company for the full EA (assuming it pays enough NI to make use of it.
And, presumably, be careful that the second employee actually does something for the week's pay. Or would it be possible to make someone Company Secretary for a week and pay them in excess of £156 for the officer role?
Ignorance of ministers re anti-avoidance provisions
As per David Gauke's response to the First Delegated Legislation Committee on 29/2/16:
The anti-avoidance provision in the National Insurance Contributions Act 2014 provides that employers who would qualify for the employment allowance only by virtue of avoidance arrangements are disqualified. To be entitled to the allowance, companies with a single director cannot simply pay a second employee £10 to requalify. Rather, the regulations will mean that they must pay the second employee enough to accrue a secondary class 1 national insurance contributions liability, which is currently more than £156 a week.
But, as I and others have pointed out above, avoidance of the exemption criteria can be achieved by making payment of £156 in a single week of the year and does not require payment to be at that level every week (as is implied by Gauke's statement "£156 a week"). Is it any wonder that the public get incensed at abuse of tax avoidance when the legislators cannot even draft a simple exemption and ensure that it applies correctly to the group that they wish to exempt? Or did Gauke really mean to say "To be entitled to the allowance, companies with a single director cannot simply pay a second employee £10 to requalify. Rather, the regulations will mean that they must pay the second employee £156 to requalify"?
Sole Trader NI Allownace qualifing?
How does this apply to a sole trader individual, ie not a Company, employing just one person, do they still qualify for the allowance?
Yes - sole trader may claim employment allowance
How does this apply to a sole trader individual, ie not a Company, employing just one person, do they still qualify for the allowance?
Yes, a sole trader will qualify for the allowance even if they only have one employee, because the purpose of the amended legislation is to exempt "owners" (in fact, directors) of the business from qualifying unless they have other employees. As a sole trader (the owner of an unincorporated business) cannot be an employee of his own business, any employees (i.e. staff other than the sole trader him/herself) must, by definition, not be the owners and are thus not exempted.
Yes they do
How does this apply to a sole trader individual, ie not a Company, employing just one person, do they still qualify for the allowance?
The new restriction doesn't apply to sole traders so yes if they are an employer they can still offset the allowance against any secondary NI liability
Agree no requirement to make secondary contributions
I looked at the draft legistion as we have had so many calls on this to our tax helpline. I also came to the conclusion that there is no need for the second earner to be earning at a point where the employer has to make any secondary contributions, there merely have to be some earnings paid to the second person and the company then becomes the secondary contributor for that person.
s1(1)(b) of the NI Contribution Act 2014 (the existing EA rules) did give me a bit of a headache (it says "in consequence, the person incurs liabilities to pay secondary Class 1 contributions") and I think this where HMRC's interpretation differed from mine. My view is that if the company pays wages more than once in a tax year that it will then incur liabilities (as opposed to a single liability)
Katherine Ford
Deputy Advisory Group Manager
Abbey Tax Protection
employment allowance
Is it not the case that where an employer takes action solely to obtain the employment allowance then HMRC could deny the allowance?. If that is the case then is it dangerous to only employ someone for 1 week unless the employer can show a genuine commercial reason to do so
Is it worth ...
... faffing arund and getting marked by HMRC as an aggressive tax avoider for £235 saving.
If the spouse is a higher rate tax payer then that week at £156 is going to cost £30, so with all teh accountants time etc, if is really not worth the bother contriving something.
Maybe you could lend them the money to pay their £61.40 tax ...
... Ooops, sorry, getting confused with another thread!
Surely too late for this
We're in April. Are we saying that the legislation we're relying on might be "updated" after the start of the financial year?
How can you advise like that?
What if the director and sole owner isn't paid?
If the sole director of the company isn't paid a salary because he is paid by a different company he also owns but has an employee who earns say £25k p.a. who runs the first company would EA be claimable for the first company?
The director takes a dividend annually from the first company.
Fine
"If the sole director of the company isn't paid a salary because he is paid by a different company he also owns but has an employee who earns say £25k p.a. who runs the first company would EA be claimable for the first company?
The director takes a dividend annually from the first company."
In that case the single person who is paid earnings isn't a director - so the condition in S4A (b) isn't met and the company is not excluded from claiming the allowance.
So what do we dom
Understand the whole thing. But what to do for the month of April ( having a sole director who has always employed his wife - as in properly employs her. Director earn £1K pm. Wife £390.
Do I or do I not claim the E/R allowance. on the 1K. Or do I bide my time?
To tick or not to tick?!
After watching HMRC webinar 'What's new for 2016' it was clear that the second e'ee has to meet 156/week criteria, but after reading this article it is not that straightforward.
Do not pay or claim pro temp
Understand the whole thing. But what to do for the month of April ( having a sole director who has always employed his wife - as in properly employs her. Director earn £1K pm. Wife £390.
Do I or do I not claim the E/R allowance. on the 1K. Or do I bide my time?
That is almost an exact duplicate of the situation I am considering.
However for April, and generally if these are the only PAYE/NI liabilities of the Company, as the monthly bill is likely to be well below £1,500 I would apply for permission through HMRC's Payment Enquiry Helpline to pay your NI and PAYE quarterly. This will mean it will be July before you have to make the first RTI EPS submission indicating whether you are claiming the employment allowance or not.
Also if the Director is on an annual NI basis, there will be no NI payable anyway until much later in the year.
Incidentally, my payroll software (QuickBooks) carries forward the Employment Allowance marker from the previous year and does not submit an EPS unless you have changed the EA marker or have another adjustment to your payment. I have discovered that this means HMRC deduct the Employer's NI up to the EA limit from the amount due in their records even though you haven't put an adjustment through your Accounts. I can see some issues with this in 2016/17..
Carry Forward of Employers Allowance by software
Understand the whole thing. But what to do for the month of April ( having a sole director who has always employed his wife - as in properly employs her. Director earn £1K pm. Wife £390.
Do I or do I not claim the E/R allowance. on the 1K. Or do I bide my time?
That is almost an exact duplicate of the situation I am considering.
However for April, and generally if these are the only PAYE/NI liabilities of the Company, as the monthly bill is likely to be well below £1,500 I would apply for permission through HMRC's Payment Enquiry Helpline to pay your NI and PAYE quarterly. This will mean it will be July before you have to make the first RTI EPS submission indicating whether you are claiming the employment allowance or not.
Also if the Director is on an annual NI basis, there will be no NI payable anyway until much later in the year.
Incidentally, my payroll software (QuickBooks) carries forward the Employment Allowance marker from the previous year and does not submit an EPS unless you have changed the EA marker or have another adjustment to your payment. I have discovered that this means HMRC deduct the Employer's NI up to the EA limit from the amount due in their records even though you haven't put an adjustment through your Accounts. I can see some issues with this in 2016/17..
My Brightpay did this but I contacted them beforehand about this and I see that this year you have to enable ( or not) again. They are very good at taking on points raised by users.
Are you using....
the alternative method for director's NI? If so switch to the standard method (i.e. apply NI threshold to cumulative earnings on an annual basis) if your software is capable of doing so - there will then be no secondary NI until the ninth month (wife's salary of £390 p/m is too small to trouble the threshold), so you won't have to claim the allowance until then - and hopefully we'll know one way or the other with some degree of certainty
Secondary contributor: SSCBA 1992, s7
@jcace: The definition of 'secondary contributor' is in primary, not secondary, legislation: SSCBA 1992, sec 7 is devoted to it. For most employees, it is the employer. For those who work through intermediaries or otherwise fall within the deeming rules in the Categorisation of Earners Regs 1978, it may be the intermediary or somebody else (eg, C of E vicars have the C of E as their deemed employer).
A secondary contributor does not need to pay any contributions. Otherwise, an employer paying a worker £112 per week, which means an FPS is required so as to get the deemed primary contributions onto the record, would have none of the obligations that fall on the secondary contributor, such as filing the FPS. Take also the example of two employers carrying on business in association who each pay the same worker £75 in the same week. Neither would be a secondary contributor if it depended on there being an obligation pay contributions, but in fact both are indeed secondary contributors and both must comply with the rules on aggregation and reporting.
I'm with Rebecca. An employer making any payment of earnings is the secondary contributor in relation to that payment and that employee.
HMRC's view is that NICA 2014, s 1(1)(b) is the key: you don't get EA unless the secondary contributor incurs liabilities to pay secondary Class 1 contributions. It believes that the new s2(4A) disqualifies the company from EA unless it has other secondary liabilities beyond those relating to the sole director. I disagree: s2(4A) looks for earnings paid, not contributions paid, which is Rebecca's point. Any earnings paid for which the company is the secondary contributor (whether or not those payments give rise to secondary NICs) mean that s2(4A) cannot apply, so the director's own earnings and secondary NIC liabilities are the yardstick for testing whether the company qualifies under s1(1).
Paying somebody £1 in earnings with the main purpose of qualifying for EA would fall foul of the anti-avoidance rule in NICA 2014, s 2(10), so EA could justifiably be denied, but the motive test is harder to apply when taking on an employee or second director for real work that benefits the business. And we shouldn't overlook the existing block on IR35 companies in NICA 2014, s 2(4) - they are already excluded from claiming EA. The professed aim of the change is to stimulate employment, so we should all be happy if all the non-IR35 sole-director companies take on extra workers, even if they are only part-time.
More Dwile flonking
Dear jcase and AndyJR81
Jcace quotes selectively from Reg 1(2) of the SS(C)R Regulations 2001. As far as is relevant this reads ‘[i]n these Regulations .... “secondary contributor” means [then follows the rest of jcase’s quotation]”. The first three words mean without something further that definition does not apply outside of the 2001 Regs.
So we have (at least) two statutory definitions of the expression “secondary contributor”. The one in the 1992 Acts, which does not require any secondary NIC to be due and the one in the 2001 Regs that does. So which definition applies for ER purposes? Section 1 (1) of the NICA 2014 tells us it is the one in the 1992 Acts. The definition in the 2001 Regs is not relevant. The 2014 Act does not import it and the 2001 Regs do not export it.
The view that any second 'employee'r does not have to be paid above the secondary threshold is supported by this Gov.UK guidance, which is, of course, at odds with other guidance:
https://www.gov.uk/claim-employment-allowance
It says under Eligibility “[y]ou can’t claim if you’re the director and only paid employee of your company”. It does not go on to say that you can’t also claim if there are other employees but there is no secondary NIC due on their pay. The guidance conflations ‘director’ with ‘employee’, of course.
It follows that I do not agree with AndyJR81's comment about the timing of the ER claim. The method of working out the NIC due on directors’ pay makes no difference.
Do away with Tax Avoidance they say
and here is a very small pebble that has caused loads of ripples in the pond.
The Office of Tax Complexification is laughing its head off.
Trick or treat?
I wonder how many tax advisors know full well that their clients aren't paying the correct tax (or have the correct employment status) but are quite happy to trick HMRC in to believing otherwise? What's good for the goose...
"It says under Eligibility “
"It says under Eligibility “[y]ou can’t claim if you’re the director and only paid employee of your company”. It does not go on to say that you can’t also claim if there are other employees but there is no secondary NIC due on their pay."
It does go on to say exactly that if you click the link to further guidance for employers at the bottom of the page, and then through to the single director companies - see the section headed "the additional employee test":
"The decisive factor is that the additional employee(s) must be paid above the Secondary Threshold (£156 in the tax year 2016 to 2017). "
"It follows that I do not agree with AndyJR81's comment about the timing of the ER claim. The method of working out the NIC due on directors’ pay makes no difference."
It makes no difference to the correct answer regarding availability of the EA, but the point I was making was that you cannot claim the EA until the director (in the specific situation asked about) exceeds the secondary threshold. Using the alternative method means making a decision on claiming (or not) by the end of this month because you have to apply the monthly threshold to his pay, whereas using the standard (annual cumulative) method kicks the decision to nine months down the line, by which time the guidance - or more likely the legislation will have been clarified. I'm simply saying you can move the goalposts slightly.
Would the additional employee come within auto enrolment?
I don't think this has been mentioned previously, but wouldn't a temporary employee for one week need to be offered auto enrollment?
Auto enrollment isn't my area, but a one or two week assignment doesn't remove someone from auto enrollment requirements, does it?
Auto enrolment
You're right - but you'd need to pay them above the automatic trigger (£192 for the week) for it to be an issue...unless they specifically state they want to opt in (which they have the right to do as they are earning more than the lower level of qualifying earnings) - I believe the employer is then required to enrol them in a scheme that can be used for auto-enrolment. Probably not likely in the circumstances though
Auto Enrolment Deferment Period
With all new employees you have the option to postpone their auto-enrolment date into a pension scheme by up to 3 months. You are expected to use this period to evaluate whether their earnings in the pension accounting period (to following 31st March) will exceed the auto-enrolment threshold (£10K p.a. pro rata) and they therefore become "eligible workers".
If you have no eligible workers at the Company's staging date you do not have to set up a pension scheme, but in that situation you still have to consider whether any new employees or any employees who were previously not eligible have become eligible (e.g. because of increased earnings) and if so you have to auto-enrol them into a Scheme within three months of the date on which they first became eligible (e.g. joining date).
Where you have postponed an eligible employee's joining date, you must write to that employee advising that you have postponed auto-enrolment to the new date with six weeks of the date on which they first became eligible. Any eligible workers and any entitled workers (those over 65 and under 22 and those who have earnings below the earnings threshold but above the lower earnings limit) may then apply to join (immediately in the case of eligible workers).
Hope this deals with your situation
And if director is low paid employee?
So a company with a low paid (less than 156 pw) director with a high paid employee (well over 11,000 pa) can claim even if HMRC guidance implies no?
So as the employee NI deductions for a director are shortly upon us , is there any further news on whether a company where the second employee earns a sum below the LEL , but the director earns above it , can legitimately claim EA , without a challenge from HMRC ? I understand ICAEW were seeking clarification on this , but I cannot recall seeing anything.
End of Jan 2017 - Any update on this?
Employee NI deductions for a director are upon us.
I have several employees (bar staff) all paid when needed. Some months, some employees do earn over £156 in a single week, but at other times they don't. I had always assumed I was entitled to EA but now I am unsure. This year (as sole director) I had planned to pay myself to £11,000 but if I don't actually qualify then I can keep my payment beneath Secondary Threshold of £8112.